• Kossan (KRI) reported a strong set of results - 1H20 PATAMI of RM195.9m (+80% yoy), although accounting for 30% and 26% of our and the consensus full-year forecasts respectively, is still within expectations

• While earnings have increased >100% qoq, we believe that they have yet to peak, as KRI will continue to raise its ASPs until the end of 2020
   
• We have tweaked our earnings for FY20-22E by 0.1%-1.5% to factor in the current performance, but keep our BUY call and 12-month TP of RM22.80.

Strong Performance Supported by Increase in Both ASP and Volume

Although Kossan’s profit more than doubled qoq, the improvement was not totally driven by ASP hikes, as overall ASPs for 2Q20 were only up by 3-5% qoq, but was also due to overall sales volumes that have risen by 6% qoq. We believe that there is still room for volume growth, as the full contribution of Plant #19 will be reflected in the next quarter, as it was only fully commissioned in June. Given the strong demand and limited new capacity available, KRI has locked in sales volumes until at least 3Q21. The next new Plant #20 (1.4bn pcs/year) which is adjacent to Plants #18 and #19 will only start contributing by 2H21.

Margins Still Have Room to Improve

Despite KRI’s EBITDA margin having improved to 27.1% in 2Q20 from 18.3% in 1Q20, we believe that there is still room for improvement, given that KRI’s management has mentioned previously that it has raised prices by 15% and 40% in July and August relative to the average ASP in 2Q20, and guided for a 5% mom increase postSeptember. The overall price increases for both July and August are more aggressive than those of its peers, as their ASPs are still significantly below market rates, and they have only started playing catch-up. There could be upside risk to our earnings forecasts if the ASP hike post-September is above 5% mom.

Reiterate BUY With An Unchanged TP of RM22.80

We have tweaked our forecasts to factor in the recent performance; however we maintain our BUY call and TP of RM22.80, based on a 28x FY21E PER. We still believe that industry ASPs can continue to surprise on the upside, as the number of new COVID-19 cases remains high, and distributors’ inventories are for less than 2 months. Risks to our call include the availability of vaccines for the public before 1H21, and spikes in forex volatility and prices of its raw material. KRI has proposed a 1 for 1 bonus issue.

Source: Affin Hwang Research - 26 Aug 2020